World Energy Outlook 2006

ates, the bigger the short-term dip in GDP growth will be but the more likely
it is that inflationary pressures will be squeezed out of the economy before
expectations of higher rates of price and wage increases become entrenched. In
practice, the monetary authorities need to strike a balance between dampening
inflationary expectations and limiting the fall in GDP growth. Contractionary
monetary and fiscal policies which are too severe could exacerbate the
recessionary effects on income and employment. But unduly expansionary
policies may simply delay the fall in real income necessitated by the increase in
oil prices, stoke up inflationary pressures and worsen the impact of higher
prices in the long run.
A fall in oil prices affects the macroeconomy of oil-importing countries in a
reverse manner, but as in the case of a price rise, the magnitude of the impact
does not match the full extent of the price change because of the offsetting
costs of structural change. Similarly, the boost to economic growth in oilexporting
countries provided by higher oil prices has, in the past, always been
less than the loss of economic growth in importing countries, such that the net
global effect has always been negative. This is explained both by the cost of
structural change and by the fact that the fall in spending in net importing
countries is typically bigger than the stimulus to spending in the exporting
countries in the first few years following a price increase. Demand in the latter
countries tends to rise only gradually, so that net global demand tends to fall in
the short term.
Quantifying the Recent Shift in the Terms of Trade
The impact of a given change in energy prices on the economy is linked to the
size of the shift in the terms of trade. That shift, in turn, depends on energyimport
intensity. Levels of and historical trends in intensity vary among
countries and regions. Some regions have seen a substantial decline in
oil-import intensity since the 1980s, notably Europe and the Pacific region
(Figure 11.18). 12 Import intensity has risen in some developing countries,
including China and India. This is mainly because improvements in the oil
intensity of their economies have been outweighed by the rapid increase in
their dependence on oil imports. 13 High net oil-import intensity – due to both
high import dependence and high oil intensity – renders developing countries
economically more vulnerable to increases in oil and gas prices than most other
12. Measured using market exchange rates. Intensity is much lower when GDP is measured using
PPP-adjusted GDP rather than market exchange rates.
13. Several factors affect oil intensity, notably climate, the structure of the economy, the stage of
economic development, the efficiency of energy-consuming processes and the availability and cost
of oil products relative to other forms of energy.
Chapter 11 - The Impact of Higher Energy Prices 299
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© OECD/IEA, 2007